One of the biggest decisions you face when choosing a mortgage is whether you should go for a fixed or variable rate. On the one hand, it’s hard to argue with the certainty and stability of a fixed rate. But then again, no-one wants to give more money to their mortgage lender than they really have to. The choice between which you choose is ultimately down to your individual circumstances.
A fixed rate mortgage is a mortgage with an interest rate that stays the same for a set period of time – usually between two to five years. Because the interest rate is fixed, your monthly mortgage repayment will stay the same for the duration of the term. When the fixed rate term expires, you’re automatically switched to a variable rate. This is usually either your lender’s standard variable rate (SVR) or a tracker rate.
The best thing about fixed-rate mortgages is that your interest rate – and therefore your monthly repayment – stays the same throughout the agreed term. This has a range of benefits. Firstly, fixed rates allow for better budgeting and allow you can easily stay on top of your monthly repayments and expenses. You also must factor in that rates can increase or decrease. Obviously, if rates increase that’s fantastic as you’ll pay less but same works vice-verser.
Speak to a mortgage advisor and do some research on the current state of the property market. This will give you a good indication of whether or not rates are likely to rise or fall in the near future and can be a good indicator of whether or not you should go fixed or variable.
Fixed rate mortgages also lack the flexibility you might find with other mortgages. They tend to have steep exit fees, at least during the fixed term period. This might act as a deterrent for anyone thinking of changing mortgage. Finally, once the fixed rate term expires, you’re put on a variable rate. This tends to be higher than the fixed rate. And, because you’ll pay more interest your monthly mortgage repayment might go up.
A variable rate mortgage is the opposite of a fixed rate mortgage. The interest rate – and, consequently, your monthly mortgage repayment – can fluctuate at any point throughout the term of the mortgage. There are two main types of variable interest rate: the standard variable rate or a tracker rate.
The standard variable rate is fixed by your lender, who can increase or decrease it at any point. Most lenders tweak their standard variable rate to reflect changes in the Bank of England’s base rate. However, they may change it even though the Bank of England’s base rate is unchanged.
A tracker rate follows the movements of another interest rate, usually the Bank of England’s base rate. So, if the base rate goes down, the tracker rate goes down too and vice versa. However, the tracker rate is usually higher than the rate being tracked. By way of example, a tracker rate could be the Bank of England’s base rate plus 2%.
The main advantage of a variable rate mortgage is the possibility that you’ll end up with a low rate and a low monthly repayment. As a plus, because you’re taking on the risk that the interest rate might rise in the future, your lender will reward you with a lower rate, at least initially.
On the downside, interest rates may rise dramatically, which means your monthly repayments could increase drastically or even become unaffordable. In theory, interest rates are influenced by supply and demand. The higher the demand for credit, the higher interest rates will be and vice versa. However, this is only a small part of the picture; and it’s hard to predict their behaviour with 100% accuracy.
There’s no right or wrong answer to this question. It really depends on your personal circumstances and your overall attitude to risk.
If you’re worried about the stability of your financial situation, you’re inexperienced or you’re simply the type of person who’d rather know exactly how much they’re in for each month, a fixed rate mortgage could be the better option for you.
With that being said, a fixed rate mortgage is still somewhat of a gamble. Interest rates might go lower, which means you could end up paying more interest than you would’ve had you opted for a variable rate mortgage.
The Bank of England’s base rate is currently at record lows. So, with this in mind, and provided you’re financially stable and comfortable with the risk that rates might rise, a variable rate mortgage may be the better option.
Of course, it’s hard to predict what will happen in the future with 100% certainty. A mortgage is a long-term commitment, and just because variable rates are low today doesn’t mean they’ll still be at these levels 10 or even 5 years down the line.